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Salesforce.com: Pricey, But Looking Good

Mar. 02, 2018 2:27 AM ETSalesforce, Inc. (CRM)9 Comments


  • Covering salesforce.com's earnings results each quarter feels like déjà vu.
  • I like the predictability of the SaaS model, as well as margins and cash flow that continue to move in the right direction.
  • CRM might prove to be a good acquisition for investors looking for quality and stability, despite the price tag.

There is no stopping SaaS behemoth salesforce.com (NYSE:CRM).

This Wednesday, the San Francisco-based company delivered yet another of its trademark all-around beats - salesforce.com has not landed short of expectations on revenues or earnings as far back as I can verify. Sales growth of 25% has remained consistently in the mid-20s range since 2014, underscoring the power of the company's subscription model. EPS of $0.35 topped consensus by a penny, arriving also 25% above year-ago levels.

Credit: Company's earnings slides

Covering the company's earnings results each quarter feels like déjà vu. The financials and op metrics continue to improve slowly but surely. While sales cloud gains scale and is likely to reach a decelerating revenue growth stage (the segment was responsible for $3.6 billion of the company's total $10.5 billion in 2018 revenues), the smaller marketing and commerce cloud division picked up the slack and posted impressive growth rates of 45% for the year.

On a non-GAAP basis, fiscal 2018 marked the expansion of op margins by another 130 bps YOY, following an 80 bp and 170 bps increase in fiscal 2017 and 2016, respectively. And although GAAP opex as a percentage of revenues inched above the 70% mark again (see graph below, on the right), the minor spike seems consistent with the seasonal trend observed in fiscal 2017. All factored in, it looks like costs continue to be under control, even if SBC expenses are still a tad too rich for my (conservative and value-oriented) taste.

Source: DM Martins Research, using data from company reports

Wrapping up the financial highlights, cash flow moved up at a faster pace than revenues, as salesforce.com's (1) collections on unrealized revenues increased substantially YOY and (2) earnings continued to improve. On the balance sheet side, the company's bank account is stuffed with $4.5 billion in greenbacks compared to last year's $2.2 billion, indicating liquidity

Note from the author: I do not own CRM in my portfolio because I believe I can generate long-term growth with limited downside risk in a much more efficient way. This is why I built my Storm-Resistant Growth Portfolio. To learn more about it, click here and take advantage of the 14-day free trial.

This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

Capital gains are of course not bank able like dividends are. But for those who understand and accept the business model rewards have been stellar.
Investors should appreciate that circa 50% of revenue on marketing is a meaningless number as the costs incurred against the current year generate revenues for multiple years in the future.

Next year the same process occurs so the percentage does not materially drop. Until the company goes ex growth (a long way off as company is only really just getting going against an ever increasing addressable market) and turns off the sales/marketing tap it will not make a GAAP profit. Shareholders are rewarded with capital gains rather than a taxable dividend based on corporate taxed profits. Seems smart approach to me.

In the meantime free cash flow, deferred and unbilled deferred revenue (aka more or less guaranteed revenues) are all there to see in plain sight for those who care to look.

Revenues worth almost twice current year are sat there on/off balance sheet waiting to be recognised - much of the expense already incurred - albeit it cost of running the service itself will be recognised along side the revenue it relates to. In the meantime the company has the blessing from long term shareholders (who have been rewarded with 4500% gains) to invest to double the business again in the next few years.
How can someone say a stock looks good and it's pricey at the same time? smh
DM Martins Research profile picture
A Ferrari is a pricey car that looks good. 🚗
Hey research guy, why dont you go buy a few pricey cars and pricey stocks then you can let us all know how much money you made.
ChuckXX profile picture
You know you look at those P E 's and you just scratch your head why people are willing to pay such astronomical prices???? I think they call it the "The Greater Fool Theory".
Damir Bobojanov profile picture
Hey, I totaly agree, however there are now types of businesess that just don't fit into value area, take AMZN or GOOGL for instance.
How to deal with them?
That is what really makes me scratching my head.
As far as you have your sales going great guns you don't have problems. )))
The Professor 007 profile picture
Any other SaaS companies like CRM that people like?
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